ROBERT REICH: Here's Why The Flat Tax Is A Fraud

Herman Cain’s bizarre 9-9-9 plan would replace much of the current tax code with a 9 per cent individual income tax and a 9 per cent sales tax. He calls it a “flat tax.”

Next week Rick Perry is set to announce his own version of a flat tax. Former House majority leader Dick Armey – now chairman of Freedom Works, a major backer of the Tea Party funded by the Koch Brothers and other portly felines (I didn’t say “fat cats”) says that will give Perry “a big boost.” Steve Forbes, one of America’s richest billionaires, who’s on the board of the Freedom Works foundation, is delighted. He’s been pushing the flat tax for years.

The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich.

We don’t know exactly what Perry will propose, but the non-partisan Tax Policy centre estimates that Cain’s plan (the only one out there so far) would lower the after-tax incomes of poor households (incomes below $30,000) by 16 to 20 per cent, while increasing the incomes of wealthier households (incomes above $200,000) by 5 to 22 per cent, on average.

Under Cain’s plan, fully 95 per cent of households with more than $1 million in income would get an average tax cut of $487,300. And capital gains (a major source of income for the very rich) would be tax free.

The details of flat-tax proposals vary, of course. But all of them end up benefiting the rich more than the poor for one simple reason: Today’s tax code is still at least moderately progressive. The rich usually pay a higher per cent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.

Nowadays most low-income households pay no federal income tax at all – a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes, and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes.

Flat-taxers pretend a flat tax is good public policy, for two reasons.

First, they say, it would simplify paying taxes. Baloney. Flat-tax proposals don’t eliminate popular deductions. (I’ll be surprised if Perry’s plan eliminates the popular mortgage-interest deduction, for example.) So most tax payers would still have to fill out lots of forms.

Second, they say a flat tax is fairer than the current system because, in Cain’s words, a flat tax “treats everyone the same.”

The truth is the current tax code treats everyone the same. It’s organised around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).

For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)

People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.

So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion of peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.

Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 per cent of their entire incomes in taxes rather than 35 per cent. Wrong. They’d only have to pay the 39 per cent rate on $1,000 – the portion of their incomes over $250,000.

Get it? We already have a flat tax – flat within each bracket.

The real problem is the top brackets are set too low relative to where the money is. The top-most bracket starts at $375,000 a year. People with incomes higher than that pay 35 per cent – again, only on that portion of their incomes exceeding $375,000. The next-highest bracket starts at $172,000 a year for individuals. They pay 33 per cent.

This is absurd. It means a professional who’s making, say, $200,000 a year pays nearly the same income-tax rate as someone making $2 billion or $20 billion.

Our current flat tax at the top is letting multi-millionaires and billionaires off the hook. It’s treating the nation’s professional class exactly the same as it treats super-rich plutocrats. My dentist pays at the same rate as Steve Forbes.

Actually, it’s worse than that because the plutocrats get most of their income in the form of capital gains, which is taxed at only 15 per cent. That’s why America’s 400 richest people – who earned an average of $300 million last year, and who have more wealth than the bottom 150 million Americans put together – now pay at a 17 per cent rate (according to the IRS).

The Republicans’ push for a flat tax masks what’s really going on.

Remember: The top 1 per cent is now raking in over 20 per cent of the nation’s total income and owns over 35 per cent of the nation’s wealth. Under almost anyone’s view of fairness, these are grotesque portions. They’re especially large relative to what they were as recently as 30 years ago, when the top 1 per cent raked in under 10 per cent. And these huge portions at the top continue to increase.

Simple fairness requires three things: More tax brackets at the top, higher rates in each bracket, and the treatment of all sources of income (capital gains included) exactly the same.

Not only fairness demands it, but also fiscal prudence. A truly progressive tax would bring in tens of billions of dollars a year from the people at the top who are in the best position to afford it.

The flat tax is even more regressive than the current tax code. We should push for a truly progressive tax instead – starting with a top rate of 70 per cent on that portion of anyone’s income that exceeds $5 million, from whatever source.